MOODY'S CONFIRMS THE LONG-TERM RATINGS OF ELECTRICITY CORPORATION OF NEW ZEALAND LIMITED (SENIOR AT Aa3)
New York, 8/21/1996 -- Moody's Investors Service confirmed Electricity Corporation of New Zealand Limited's (ECNZ's) long-term credit ratings at Aa3 and its short-term debt rating at Prime-1. This concludes a review of the long-term ratings that began on June 9, 1995 in response to the New Zealand government's stated intention to split ECNZ into two competing state-owned Enterprises (SOE's), which occurred on February 1, 1996. The short-term rating was not under review.
The confirmations reflect Moody's expectation that moderately increased business risk due to competition from the new SOE, Contact Energy, will not materially impair ECNZ's ability to generate cash flow, nor affect its low operating risk and stable revenue stream. Overall financial risk is also likely to remain low.
Confirmed at Aa3 are ECNZ's senior unsecured debt, its US dollar- and NZ dollar-denominated medium-term notes, and its counterparty rating.
With the February split, ECNZ's generating market share was reduced from near 100% to about 70%, while the new competitor, Contact Energy, obtained approximately a 28% share. Due to the reduced market share and new competition, ECNZ faces some increase in business risk. But this risk will remain moderate, since the company will continue to be New Zealand's largest and lowest-cost electric power generator for the foreseeable future. In addition, ECNZ's plan to cut its debt burden through an insubstance defeasance and its ability to increase margins through price hikes as new Independent Power Producers (IPP) enter the market should reduce its financial risk. Moody's believes that ECNZ's ratings are supported by its strategic importance to the New Zealand government.
Of ongoing concern, however, is the continued aggressive financial management of ECNZ by the shareholder. The government will likely use a high dividend payout ratio and special one-off dividend payments to maintain the debt/total capitalization ratio at approximately 40%; all moneys in excess will be dividended out. This policy could prevent equity growth and will result in the maintenance of low retained cash flow relative to total debt. The policy could also allow the payment of cash dividends from the proceeds of debt which has been raised on the basis of a positive revaluation of ECNZ's assets. The government will likely receive future special dividend from the expected positive revaluation of ECNZ's assets in 1996.
Continued restrictions on ECNZ's ability to increase generating capacity, as specified in the Memorandum of Understanding, will gradually erode market share over the medium-term. Additions to New Zealand's generation capacity will increasingly come from new Independent Power Producers (IPP) or co-generation projects. But ECNZ's market share is expected to remain above 50% until 2005. And its capital expenditures will probably remain low in the medium term due to the restriction on ECNZ's ability to increase generation capacity. The only significant near-term project is the second tail race tunnel for the Manapouri plant.
ECNZ's margins could come under pressure as the market becomes more competitive. However, this will be mitigated by its continuing focus on cost efficiencies; by its retention following the February split of seven of the eight lowest-cost hydro plants, giving it a decided cost advantage; by its ability to raise prices as higher marginal cost generators enter the market; and by its overall financial strength and flexibility, which should enable it to effectively meet competitive challenges.
Electricity Corporation of New Zealand Limited is based in Wellington, New Zealand and had total assets of approximately NZ$3.3 billion at February 1, 1996, post reavaluation.
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